Obamacare: the next public utility

For millions of Californians who buy health insurance on their own – and even for many who get it through work – the Affordable Care Act will change almost everything about the experience.

The federal health reform law completely upends the business model of private insurance companies, changing their incentives and, very likely, the way they deal with customers.

Under current law, which goes away on Jan. 1, insurance companies make money by minimizing their risk, and they do that by screening out potential customers who might actually need the product the insurance companies are selling. Using questionnaires and detailed interviews about a person's medical history, insurers decide who is most likely to get sick. If you are one of those people, you will probably not be offered coverage. If you do get a chance to buy a policy, it will be priced at a level you will almost certainly not find affordable.

But in a few months that will no longer be the case.

Come the new year, insurance companies will be required to offer coverage to anyone who wants to buy it, no matter what their health history might be. And they won't be able to charge you more if you have been sick.

The new law brings plenty of other new rules along with it.

Currently, older people are charged more than young people, because older people are more likely to get sick. But that gap – typically older people pay $5 for every $1 charged a younger person – will be limited to 3-to-1 once the new law takes full effect next year.

Other than age, the only factor on which insurance companies will be able to base different rates for the same coverage sold to different people will be geography, and only to reflect the difference in health care costs from one part of the state to another.

This means, generally, that older and sicker people will not only be able to get insurance, they will pay less than they would today – if they were able to find someone willing to sell them a policy. Younger people and healthy people will generally pay more under the new rules, although for many, the increase in premiums will be offset by federal tax credits that are part of the law.

Insurance sold under the Affordable Care Act will also come with no annual or lifetime caps on how much a customer can claim for doctor or hospital bills or prescription drugs. Under the old system, many policies had these limits, which meant that the sickest people, with the highest health care bills, lost their coverage just when they needed it most.

Another new perk: Preventive care, including immunizations, disease screenings and contraception, will be available with no out-of-pocket cost to the consumer. Instead, the cost of these items will be pooled and built into the monthly premiums that everyone pays.

That pooling of risk, in fact, is a key concept that runs throughout the new insurance rules brought on by the federal reform. Instead of a system in which healthy people do OK while the sick are forced to pay more or fend for themselves, in the new system costs will be spread over the entire population.

That might seem unfair, or even unwise, to healthy people and to young people who earn too much to be eligible for the new subsidies. But the idea is that nearly everyone, at some point, will be either sick or old or both, and when they reach that point, they will benefit from the new rules.

Since insurance companies will no longer be able to deny coverage to people they deem too high a risk, how will they distinguish themselves from one another?

“Health plans will be differentiated based on networks and price and customer satisfaction, and not on medical underwriting,” says Patrick Johnston, president of the California Association of Health Plans, an industry trade group. “That's a major change.”

Anthem Blue Cross, for example, has agreements with the University of California hospitals as part of its network. Kaiser Permanente offers its familiar “staff plan” that gives consumers more of a coordinated, one-stop shop for their health needs. In San Diego, Sacramento and many other parts of the state, locally based health plans are competing for business with the statewide plans such as Anthem, Blue Shield and Health Net.

And under the new rules, they all have to offer the same set of minimum benefits. Consumers who buy their coverage through the state's new online marketplace – Covered California – will really need to decide only one thing: Do they want to pay more up front or possibly pay more later? Plans in the exchange will be ranked platinum, gold, silver and bronze, with the more expensive plans also paying a higher share of a consumer's doctor bills. But the benefits and plan details at each level will be the same, regardless of the company selling the coverage.

Health insurance rates and profits, while not regulated directly by the Affordable Care Act, will still come under pressure. Companies have to give public notice if they intend to raise rates, and they must justify their premium hikes to state regulators. They can still raise rates even if the state says a price increase is unwarranted, but they will be under more public scrutiny if they do so.

And while their profits are not capped, insurance companies can spend no more than 20 percent of their revenue on things other than health care – administration, marketing and profits.

In the end, the industry will be transformed into something resembling a public utility – required to serve everyone, with standardized products and strictly regulated practices.

In return, they are supposed to get a guaranteed customer base. The law requires nearly everyone to have insurance or else pay a penalty on their taxes.

But while the new rules for insurance companies are already law and will soon be enforced in full, no one really knows how many new customers the law will generate.

The answer to that question might determine whether the Affordable Care Act succeeds or fails.

Daniel Weintraub has covered public policy in California for 25 years. He is editor of the California Health Report at healthycal.org